“Investing can only be learnt, not taught”

Anish Teli has been investing in Indian equities for over 15 years in a professional & personal capacity. After senior roles & successful Private Equity investments of more than $2 billion with ICICI Venture, Anish spent almost 3 years at Morgan Stanley Private Equity Asia, where was also part of the Investment Committee for one of the PE funds. In 2011, he decided to become an independent investor and focus exclusively on listed Indian equities.

In a detailed chat with the smallcase team, Anish discusses his investor journey, his inspirations & investment style, the impact of elections on markets, views on passive investing, and all things market.

How did you get into the markets space?

I have been investing in the stock market since 1999 when I was doing my CA and used to regularly read the ET on my commute to work. I remember the first two stocks that I bought with my article-ship stipend. One was SAIL and other was Premier Auto. I bought SAIL because it was available 0.5 P/B and the steel cycle was in a downturn. I bought Premier Auto because it had a huge landbank in Mumbai and reasoned that even if the company wasn’t doing well there was a margin of safety in asset value. SAIL did well for me, and I made a 4x on it. Premier Auto was a loss and ultimately the company shut down. But this stoked my interest and markets hooked me forever.

How has the journey been from being a very active investor in (private) equity markets to an advocate for passive investing?

It has been a very interesting journey. I had to really re-examine my core beliefs about investing. It taught me to have an open mind and check important assumptions with data myself. It is only when you do the analysis yourself, you realise you may have taken some mental shortcut in thinking about an investment decision. Therefore, we use checklists and processes to ensure that this doesn’t happen.

I started investing as an ardent Warren Buffett disciple. His teachings were very simple, appealing and easy to understand. It stood me in good stead during my private equity investing career also.

However, I used to wonder why such a successful investor would tell other investors to invest in index funds. He has been saying for the longest time that for the “do-nothing” investor, it makes perfect sense to invest in Index Funds. In fact, Jack Bogle is one of the persons he greatly admires and says that no one has done more for the average American investor than Jack Bogle.

It wasn’t until 2011 when I became a full-time public markets investor, that I studied what he said, and it made sense. I also evaluated index funds and ETFs and found them to be an excellent vehicle for investing for retail non full-time investors. I continued to track the space.

I also evaluated the MF space and found that it is more difficult to pick a mutual fund than it is to pick stocks because of the many variables involved. For the non-full time and do-nothing investor, it makes more sense to look at index funds and passive investing.

Passive has a rather negative connotation from a human behaviour point of view. We have been told, don’t sit idle do something. Here it is the opposite, don’t do something, sit tight and observe.

I also like Prof Aswath Damodaran’s take on this – he’s an active investor in spite of the data & analysis saying that one would be better off investing in an index fund. But this is because he is his only client & he enjoys the process of investing. He’s also made peace with the fact that if he ultimately discovers that he’s just matched or underperformed index funds, he wouldn’t be disappointed with that. That’s a very clear stand. Also being a full-time tenured professor I am sure his retirement needs have been taken care of. So he is really being a full-time investor with his surplus investible funds. And that the perfect example of a “core’’ and “explore” investor.

Coming back to my becoming an advocate of passive investing for most investors, the trigger was this study we did on studying returns delivered by the equity mutual fund industry. And to my astonishment, it exactly matched what Jack Bogle had found many years ago.

The mutual fund industry had underperformed the broad benchmark Nifty 50 over a long period of almost two decades, by approximately 2%. And that is what MFs have been charging. We also looked at rolling returns & found that in no 15-year window did MFs as whole manage to beat Index Funds. They are just not able to overcome the drag.

That’s when I started talking to my clients about the “Core” and “Explore” philosophy of investing for long term goals like retirement corpus, where the Core should comprise of low cost passively managed instruments and Explore should comprise of actively managed strategies.

This year we also helped a number of clients restructure their mutual fund portfolios. In many cases, we found clients had over 10 equity mutual funds in their portfolio with a correlation of more than 90% in underlying MF holdings! So even though they had bought many funds in the name of diversification, it was still one giant portfolio if you looked at the correlations and holdings overlap.

When/how did you decide to take the plunge & start the PMS business?

Once I had done my research and covered the wide breadth of what was out there, it was time to start chipping away & drop what was not important. I carved out my investing philosophy & execution plan from my experiences & after talking to several people about my journey. They helped me examine my mistakes as a fundamental investor & made me realise the positive impact of adding layers of risk management & quantitative tools on investment processes & profitability. After seeing my philosophy & vision, many asked if I could do this for them.

And that’s how I set up my PMS business. I run it exactly as I would invest my own money. And my own money is invested alongside the client in the same manner. Therefore, my interests are completely aligned with clients. I look for clients whose philosophy aligns with ours and take on board those clients only. So that over a period we form a self-selected group of investors.

So what’s the mission/belief behind the firm you’ve started?

QED Capital aims to help investors build a corpus for financial freedom, retirement or other long-term goals – primarily by following the “Core and Explore” philosophy of portfolio construction. We also focus on managing downside risk via an algorithm-driven & robust risk management process. Our glide path-based approach of gradually reducing risk as you reach closer to your goal will help in preserving corpus.

In short, Index Alpha + AlphaBets will guide you towards your financial goals the way that is right for you.

Can you talk about your newly launched smallcase and explain your investing philosophy?

Our aim is to enable investors to build a corpus for financial freedom, retirement or any other long-term goal by following “Core and Explore” philosophy of portfolio construction. Currently, we have launched the Index Alpha smallcase, which is a low-cost portfolio comprising of passive Index ETF/MFs and can be the “Core” of any long-term investment portfolio.

Soon we will also launch “AlphaBets” which is an actively managed portfolio of stocks and should be the “Explore” part of the portfolio. Our algorithmic system driven risk management process will help in managing downside risk. We want to focus on affordable, transparent, and simple to understand product solutions for our clients which is in line with our vision.

I want our research-based portfolio solutions to be accessible to all investors – and smallcase is the perfect platform to help us reach them.

Therefore, we have launched the Index Alpha smallcase at a price of only Rs. 1/day to begin with. This will make it affordable for all.

Index Alpha PMS version is a customized version of the IndexAlpha smallcase. Depending on the client’s objective and goals we design and manage the portfolio for them. We have created Index Alpha smallcase, after a lot of research and testing, in a way that it should be a good starter and “Core” portfolio of index funds for most investors.

Your views on the evolution of passive investing in India? How quickly do you think it will gain in popularity with Indian investors?

There are various factors which will get more investors to invest in Index Funds.

It is well documented & known fact that around 90% of mutual funds in US & over 60% MFs in India (large caps) are unable to beat index funds. This makes the odds of choosing an outperforming mutual fund, worse than a coin toss.

Add to it the lack of persistency in mutual fund performance and the odds that a top performing mutual fund will keep its spot in the next 4-5 years is less than 30% because there is mean reversion in performance.

Investors are return driven and are sold products by distributors so far. However, with technology and younger more informed and savvy investors entering, this trend is changing. Most fee-only advisors are also advising their clients to invest in Index Funds. So, the popularity of index funds will only go up.

What is the one thing that you’d like to see improve in the industry?

Fund managers and advisors adopting fee structures which reduce conflict of interest and align their interests with that of their investors. Fees for active strategies like equity mutual funds must be lower and linked to performance. Also, skin in the game.

Are there any investors that you draw inspiration from?

Among the 150+ books that I read on the journey to becoming a full-time public market investor, the most influential and eye-opening for me was the series Market Wizards by Jack Schwager. They were like the market’s version of Vivekananda’s talks for me.

Every market wizard featured in the book had their own path and struggles to reach success. Each one of them had some commonalities in the general path but the specifics of their journey were different. Everyone had made similar mistakes, reacted differently and rebounded back from the low points. The goal was the same. Success as an investor or trader. To be the best in their chosen field. Enjoy the journey and flow along.

The message from each one of them was the same: There is no one path in the market. But there are certain common principles that one can follow to build one’s own guiding philosophy.

I learnt something from Jesse Livermore, Ben Graham, Warren Buffett, George Soros, Benoit Mandelbrot, Stan Druckenmiller, Jim Simons, Charlie Munger, William O’Neil, Mark Minervini, Rakesh Jhunjhunwala, Rajiv Khanna, Vijay Kedia, Renuka Ramnath, Prof. Mankekar and I can go on.

However, I was not anything like them. I chose to learn from them, what aspect was missing in me and how I could plug that. Investing can only be learnt and not taught.

My style of investing is process driven and a blend of fundamental and quantitative factors. My fundamental investing background gives me a good framework to screen and evaluate investing candidates. The quantitative techniques help me in executing my plan and managing risk. In fact, investing is more about managing risk because is in your control. The risk depends on markets and other factors.

What’s your outlook for stock markets in 2019, pre/post elections?

It is just short-term noise. We focus on our investing process and factor these in. In fact, not so long ago, the noise was that if Trump actually becomes president then gold will shoot up and the Dow Jones will collapse. The opposite happened. Dow is up approximately 40% from Nov 2016 and Gold is absolutely flat. In the long term prices are slaves of earnings and in the short term they are driven by emotions

As an investor, what are some of the biases that you personally feel are important & keep a check on?

In this age of information overload, the edge is going to be more behavioural in the future. There are certain cognitive errors that human beings make with great regularity which cause them to make sub-optimal decisions when it comes to investing. Individual humans learn, but collectively human beings tend to repeat those cognitive errors.

Some common ones are:

• Herding: Also known as the “bandwagon effect,” herding is the tendency for individuals to mimic the actions of a larger group.
• Anchoring Bias: The tendency to rely too heavily on the first piece of information received.
• Confirmation Bias: The tendency to ignore information contradictory to prior beliefs.
• Disposition Effect: Investors tend to sell winners too early and hold on to losers too long. This occurs because investors like to realize their gains but not their losses, hoping to “make back” what has been lost.

Together, these biases cause investors to either under- or over-react to information, causing pricing inefficiencies and irrational behaviour. This creates a “behaviour gap” between what investors can achieve and what they actually achieve. Disciplined process driven decision making and execution will help an investor bridge that gap.

What are your views on smallcases?

smallcase is an excellent tool for investors to bridge the behaviour gap that I mentioned above. It will help investors to be disciplined and process-driven in their investment process.

Also, it is a very good vehicle for a vast majority of investors who are looking for a solution between complete DIY investing and MFs.

You can also connect with the advisor/research team which has built the smallcase and understand the rationale in detail. This is not the case with mutual funds.

We like low cost, transparent, and simple to understand products. smallcase fulfils that criteria.

Any advice for young & new investors?

• Start investing early & experience a market cycle, even if you can only invest small amounts
• Have a simple financial plan that has an emergency fund & adequate Term & Medical Insurance cover
• Determine investment goal & invest accordingly. Then, stay the course – which is easier said than done
• Invest in simple to understand & transparent products: index funds meet these criteria.
• Costs matter – what you pay in fees is what you don’t get in returns
• Understand that asset allocation accounts for the majority of your investment gains. First, learn more about finding the right allocation for yourself before deciding on specific investments
• If you feel overwhelmed or have doubts, hire a fee-only planner to develop your financial plan. Would you trust a doctor who takes no money from you & instead gets paid by the pharma company? So why would you want to go to distributors for advice when they are being remunerated by the AMC?